Chapter 8
Reporting and Analyzing
Long-Term Assets
QUESTIONS
1. A plant asset is tangible; it is used in the production or sale of other assets or services;
and it has a useful life longer than one accounting period.
depreciated.
5. The Accumulated Depreciation—Machinery account is a contra asset account with a
6. The Modified Accelerated Cost Recovery System is not generally acceptable for financial
8. Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
9. A company might sell or exchange an asset when it reaches the end of its useful life, or
13. Intangible assets are generally recorded at their cost and amortized over their predicted
14. A company has goodwill when its value exceeds the value of its individual assets and
15. No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires
that goodwill be annually tested for impairment. If the book value of goodwill does not
16. Total asset turnover is calculated by dividing net sales by average total assets.
21. (a) The main difference between plant assets and current assets is that current assets
QUICK STUDIES
Quick Study 8-1 (10 minutes)
Quick Study 8-2 (10 minutes)
Expensed or Capitalized Asset Category (if any) .
1. Expensed —
2. Capitalized Equipment
Quick Study 8-3 (10 minutes)
Straight-line:
Quick Study 8-4 (10 minutes)
Quick Study 8-5 (10 minutes)
$65,800
Cost
Quick Study 8-6 (10 minutes)
First year:
Quick Study 8-7 (10 minutes)
Impairment Loss …………………………………………………….
1,250
Quick Study 8-8 (10 minutes)
1. (a) Capital expenditure
2.
(a) Equipment……………………………………………………….
40,000
Cash ……………………………………………………….
Cash ……………………………………………………….
Quick Study 8-9 (15 minutes)
Book value of old equipment = $76,800 – $40,800 = $36,000
1.
Cash ……………………………………………………………………..
47,000
Accumulated depreciation ……………………………………..
40,800
2.
Cash ……………………………………………………………………..
36,000
Accumulated depreciation ……………………………………..
40,800
3.
Cash ……………………………………………………………………..
31,000
Accumulated depreciation ……………………………………..
40,800
Equipment…………………………..…………………………..
Quick Study 8-10 (10 minutes)
1.
Ore Mine ………………………………………………………………..
1,800,000
1,800,000
2.
Depletion per unit = = $1.60 per ton
Quick Study 8-11 (10 minutes)
a. Oil well NR
Quick Study 8-12 (10 minutes)
1.
Jan. 4
Leasehold Improvements ………………………………………..
105,000
105,000
2.
$1,800,000 – $200,000
1,000,000 tons
Quick Study 8-13 (10 minutes)
Total asset turnover = = 0.80 times
($ thousands)
Quick Study 8-14A (10 minutes)
Book value of old machine = $42,400 – $18,400 = $24,000
1.
Machinery (new) ………………………………………………..
52,000
18,400
Machinery (old) ………………………………………….
Cash ………………………………………………………….
2.
Machinery (new)* ……………………………………………….
46,000
18,400
Machinery (old) ………………………………………….
Quick Study 8-15 (10 minutes)
1. Accounting for plant assets involving cost determination,
2. U.S. GAAP prohibits companies to record increases in the value of
$14,800
($19,100 + $17,900) / 2
EXERCISES
Exercise 8-1 (15 minutes)
Invoice price of machine …………………………………………………
$ 12,500
Less discount (.02 x $12,500) ………………………………………….
Assembly ……………………………………………………………………….
Materials used in adjusting ……………………………………………..
Exercise 8-2 (15 minutes)
Cost of land
Purchase price for land …………………………………………………..
$ 280,000
Purchase price for old building …………………………..
Cost of new building and land improvements
Total construction costs …………………………..…………………….
Journal entry
Land ……………………………………………………………………..
470,500
Land Improvements ……………………………………………….
Exercise 8-3 (20 minutes)
Allocation of total cost
Appraised
Value
Percent
of Total
Applying %
to Cost
Apportioned
Cost
Land …………………………
$157,040
40%
$395,380 x .40
$158,152
15
59,307
$395,380 x .45
$392,600
$395,380
395,380
Exercise 8-4 (10 minutes)
Straight-line
Exercise 8-5 (10 minutes)
Exercise 8-6 (15 minutes)
Double-declining-balance
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
Exercise 8-7 (15 minutes)
Year
Annual Depreciation
Year-End Book Value
2016 ……..
$ 32,250
$121,750
2018 ……..
Exercise 8-8 (20 minutes)
Double-declining-balance depreciation
Year
Beginning-Year
Book Value
Depreciation
Rate
Annual
Depreciation
Year-End
Book Value
2016 …….
$154,000
50%
$ 77,000
$77,000
2017 …….
2018 …….
2019 …….
Exercise 8-9 (30 minutes)
Straight-line depreciation
Income
before
Depreciation
Depreciation
Expense*
Net
Income
Year 1 ……..
$ 88,500
$ 38,960
$ 49,540
Year 3 ……..
Year 5 ……..
Exercise 8-10 (30 minutes)
Double-declining-balance depreciation
Income
before
Depreciation
Depreciation
Expense*
Net
Income
Year 1 ……..
$ 88,500
$ 95,360
$ (6,860)
Year 4 ……..
Beginning
Book
Value
Annual
Depreciation
(40% of
Book Value)
Accumulated
Depreciation at
the End of the
Year
Ending Book Value
($238,400 Cost Less
Accumulated
Depreciation)
Year 1 ……………
$238,400
$ 95,360
$ 95,360
$143,040
Year 2 ……………
Year 3 ……………
Year 4 ……………
Year 5 ……………
Exercise 8-11 (10 minutes)
Straight-line depreciation for 2015
Exercise 8-12 (15 minutes)
Double-declining-balance depreciation for 2015 and 2016:
Rate = (100% / 5 years) x 2 = 40%
Depreciation for 2015 ($280,000 x 40% x 9/12) ……………
$ 84,000
Book value at January 1, 2016 ($280,000 – $84,000) ……
$196,000
Depreciation for 2016 ($196,000 x 40%) ……………………..
$ 78,400
Exercise 8-13 (15 minutes)
1.
Original cost of machine …………………………………………………….
$ 23,860
Less two years’ accumulated depreciation
[($23,860 – $2,400) / 4 years] x 2 years …………………………..
Book value at end of second year ……………………………………….
$ 13,130
2.
Book value at end of second year ……………………………………….
$ 13,130
Less revised salvage value …………………………………………………
Exercise 8-14 (15 minutes)
1.
Equipment ……………………………………………………………
22,000
Cash ………………………………………………………………
22,000
To record betterment.
2.
Repairs Expense …………………………………………………..
Cash ………………………………………………………………
To record ordinary repairs.
3.
Equipment ……………………………………………………………
14,870
Cash ………………………………………………………………
14,870
To record extraordinary repairs.
Exercise 8-15 (25 minutes)
1. Annual depreciation = $572,000 / 20 years = $28,600 per year
2. Entry to record the extraordinary repairs
Building …………………………………………………………………
68,350
Cash ………………………………………………………………
68,350
To record extraordinary repairs.
3.
Cost of building
$640,350
Less accumulated depreciation …………………………..
4.
Revised book value of building (part 3) ………………………
$211,350
New estimate of useful life (20 – 15 + 5) ………………………
Depreciation Expense …………………………………………….
21,135
21,135
Exercise 8-16 (20 minutes)
Note: Book value of milling machine = $250,000 – $182,000 = $68,000
1. Disposed at no value
Jan. 3
Loss on Disposal of Milling Machine …………………….
68,000
2. Sold for $35,000 cash
Jan. 3
Cash ……………………………………………………………………
35,000
Loss on Sale of Milling Machine …………………………..
33,000
3. Sold for $68,000 cash
Jan. 3
Cash ……………………………………………………………………
68,000
4. Sold for $80,000 cash
Jan. 3
Cash ……………………………………………………………………
80,000
Exercise 8-17 (25 minutes)
2020
July 1
1. Sold for $45,500 cash
July 1
Cash ……………………………………………………………………
45,500
67,500
2. Destroyed by fire with $25,000 cash insurance settlement
July 1
Cash ……………………………………………………………………
25,000
12,500
Exercise 8-18 (10 minutes)
Dec. 31
Depletion Expense—Mineral Deposit ……………………
405,528
Exercise 8-19 (10 minutes)
Jan. 1
Copyright ……………………………………………………….
418,000
Exercise 8-20 (10 minutes)
Exercise 8-21 (15 minutes)
Exercise 8-22 (15 minutes)
Total asset turnover for 2015 = = 3.36
$5,856,480
($1,800,000 + $1,686,000)/2
Exercise 8-23A (15 minutes)
1. Book value of the old tractor ($96,000 – $52,500) …………………….. $ 43,500
2. Loss on the exchange
Exercise 8-24A (25 minutes)
1. Sold for $18,250 cash
2. $25,000 trade-in allowance exceeds book value; but no gain is
recognized on an asset exchange that lacks commercial substance
($5,625 gain is ‘buried’ in the cost of the new machinery)
3. $15,000 trade-in allowance is less than book value (yielding a loss)
Exercise 8-25 (20 minutes)
(Amounts for this exercise are in euros millions)
1.
Depreciation expense …………………………………………….
7,509
2.
Property, plant and equipment ……………………………….
11,560
3.
Cash ……………………………………………………………………..
720
PROBLEM SET A
Problem 8-1A (50 minutes)
Part 1
Estimated
Market Value
Percent
of Total
Apportioned
Cost
2016
Jan. 1
Building ……………………………………………………….
477,000
279,000
117,000
Part 2
Part 3
Part 4
Accelerated depreciation does not lower the total amount of taxes paid over
the asset’s life. Instead, it defers or postpones taxes to the later years of an
Problem 8-2A (25 minutes)
Cost of machine ……………………………………………………..
$257,500
Less estimated salvage value …………………………..
Year
Straight–Linea
Units–of-Productionb
Double-Declining-
Balancec
1 ………………….
$ 59,375
$110,000
$128,750
3 ………………….
$237,500
$237,500
$237,500
bUnits-of-production:
Cost per unit = $237,500/475,000 units = $0.50 per unit
Year
Units
Unit Cost
Depreciation
1 …………….
220,000
$0.50
$110,000
2 …………….
124,600
4 …………….
4,300*
cDouble-declining-balance:
Year
Beginning
Book
Value
Annual
Depreciation
(50% of
Book Value)
Accumulated
Depreciation
at the End of
the Year
Ending Book Value
($257,500 Cost Less
Accumulated
Depreciation)
1 ………
$257,500
$128,750
$128,750
$128,750
128,750
4 ………